The Fine Print
When insurance buyers seek out hard-to-place risks — coastal property-catastrophe insurance in coastal Florida, for instance — they turn to a retail broker who in turn seeks coverage from a wholesale broker with access to surplus lines insurers or other specialty markets.
Trouble may ensue, however, if the agreement between the retailer and wholesaler are unwritten or otherwise unclear. Too often, that is the case.
Mark Robinson, co-founder of national law firm, Michelman & Robinson, LLP, and chair of the firm’s insurance industry group, said that “it is alarmingly common for wholesale insurance brokers to not have formal written agreements in place with their retail producers, which exposes the wholesaler to potential liability.”
“While some of the key points that should be included in a written agreement are rather obvious — commission rates, payment of premiums, etc. — other essential terms such as the scope of binding authority, special cancellation provisions, and ownership of expirations can be much more nuanced, and should be spelled out in detail so as to mitigate the risk of conflicting interpretations,” he said.
Robinson noted that “it is critical that wholesaler/retailer agreements contain a mutual indemnification provision as a safeguard against third-party claims resulting from one party’s negligent acts, errors or omissions, or breach of duties under the agreement.”
In terms of commissions, for instance, “It’s pretty obvious [the rate should be spelled out], Robinson said, but contracts also need to spell out whether there is a right to change the commission rate paid to the retailer by the wholesaler at some stage.
Bernie Heinze, executive director of the American Association of Managing General Agents (AAMGA) in King of Prussia, Pa., agreed.
“In an age where lawsuits are quick to follow on the heels of many adverse coverage determinations, it is extremely important that these specific roles and responsibilities and expectations are specifically delineated, and it’s necessary that each party to the transaction understands their legal and contractual responsibilities,” said Heinze.
“It’s important to understand that it’s the carrier that has expressly conveyed and delegated its authority to bind risks in accordance with its underwriting guidelines and its risk appetite to the wholesaler, which serves the role of the defacto branch office of the insurer,” he said.
“In order to be in compliance with the statutory obligations of the insurer and its duties to the market,” he said, “the wholesaler has to be sure and the retailer similarly must be certain that the lines of demarcation between them have been established and understood.
“This would also include the issuance of certificates of insurance and endorsements to the policy, which are derived specifically from the authority the carrier has conveyed to the wholesaler,” Heinze said.
These certificates and endorsements can essentially change the coverage grants of the policy, Heinze noted.
Robinson said that “if the retailer thinks they have binding authority and represents to the risk manager, ‘This is bound. No worries,’ it could turn into a complicated legal issue.
“The agreement should expressly provide that the retail producer has no authority to bind, make, alter, vary, issue or discharge any insurance policy, extend the time for payment of premiums, waive or extend any policy obligation or condition, or incur any liability on behalf of the wholesaler or the insurers,” he said.
An attorney/consultant who has worked with insurance brokers for more than 25 years, and requested anonymity, said that in the 1980s, representatives of both retail and wholesale tried to address concerns over these sorts of agreements, with some organizations proposing a model contract.
Nothing came of the various initiatives, the attorney noted, due to the disparate nature of the wholesale universe, which includes small independents, national firms and boutiques.
Particularly problematic issues related to wholesale/retail broker contracts are commission, regulatory and licensing requirements, and the fulfillment of premium tax payment obligations.
Another area of complexity was that wholesale brokerage community agreements can vary widely between individual organizations, he said.
Particularly problematic were commission, regulatory and licensing requirements, and the fulfillment of premium tax payment obligations, he said.
Some of these difficulties may have been eased or resolved by the passage of the Nonadmitted Reinsurance Reform Act in 2010, he said. The NRRA states that only one state, the home state of the insured, can regulate and tax a nonadmitted transaction.
That’s not to suggest that conflicts cannot still emerge if the correct contract language is not in place. Quite the contrary in fact, he said.